By Katie Reid

ZURICH (Reuters) - Synthes <SYST.VX> said on Monday it was in takeover talks with Johnson & Johnson <JNJ.N>, after reports the U.S. group is looking to buy the Swiss medical device maker for about $20 billion.

A source familiar with the situation told Reuters at the weekend the two sides were in preliminary talks.

A deal at $20 billion would mark an 11 percent premium over Synthes's current market capitalization of about $18 billion and would allow healthcare conglomerate J&J to further diversify its healthcare business.

Shares in Synthes were indicated 4.5 percent higher, according to pre-market data provided by bank Clariden Leu, after gaining 6.2 percent on Friday as talk circulated that J&J or Medtronic <MDT.N> could be looking to buy the company.

"In response to market speculation, Synthes Inc confirms that it is engaged in discussions with Johnson & Johnson about a potential business combination transaction," Synthes said in a statement.

"No assurance can be given as to whether, when or on what terms any possible transaction might occur. Synthes does not intend to make any further public statements unless and until a definitive agreement has been reached, or until discussions between the parties have terminated," the group said.

Buying Synthes would be J&J's biggest acquisition and would help the cash-rich U.S. healthcare conglomerate further diversify its business by giving it a leading position in equipment to treat broken bones and trauma.

Synthes makes nails, screws and plates to fix broken bones as well as artificial spine discs.

So far this year, its shares have risen 9.8 percent, outperforming a near 1 percent fall in the European health care sector index <.SXDP>.

CONSOLIDATION CRUNCH

The medical device sector has been consolidating as pharmaceutical companies look to diversify away from drugs going off patent.

Other recent medical device deals include the $5.8 billion acquisition of Beckman Coulter by Danaher Corp <DHR.N>, announced in February.

There had previously been speculation that J&J, which had cash and short-term investments of $27.7 billion at the end of 2010 and will report results on April 19, was interested in buying British orthopedics company Smith & Nephew <SN.L>.

Medical devices and diagnostics accounted for 40 percent of J&J's $61.6 billion in 2010 sales but the business has been hit by competition and recalls in its hip and knee replacement unit.

J&J owns around 250 separate companies under its corporate umbrella. The group attempted to buy U.S. medical device maker Guidant several years ago, but was outbid by Boston Scientific Corp <BSX.N>.

The healthcare sector has seen a string of international mergers, including the acquisition of U.S. biotech company Genzyme by France's Sanofi Aventis <SASY.PA>. Canada's Valeant Pharmaceuticals International <VRX.TO> has also made a hostile bid for Cephalon Inc <CEPH.O>.

(Editing by Will Waterman and Ben Hirschler)